Legal Fees Explained Series

Bradley Sinclair - June 2010

Part Three - Real Property Reports

When someone sells their home or bareland condo unit, it is almost certain that they will require a Real Property Report (RPR) with compliance. In this paper I will outline the seller's obligations and buyer's rights with respect to the RPR set out in the contract and discuss the ways that the seller can deal with potential problems that may arise concerning compliance on the RPR.

A. AREA Listing Agreement

In the AREA Listing Contract, there are two major sections that deal with the RPR.

In para 11.1, the seller agrees that they will provide the brokerage with an RPR with compliance.

The RPR is evidence that the property complies with the warranties that the seller gives in para 13.2 (b) and (.c) of the listing contract - that no improvements encroach outside the property or onto utility right of ways or easements and that the improvements are located in compliance with city bylaws.

It is noted in bold wording in para 11.1 that not having a current RPR with compliance can result in complications on closings or rescission of the purchase contract.

Although the seller is put on notice at this point, they often do not grasp the importance of their obligations when listing a home, therefore it is my opinion that it becomes the duty of the listing agent to ensure that this is followed up.

Do not rely on simply giving advice to the seller to follow up with the RPR - they often will not do it and, if the property is sold and the RPR is not up to date, with compliance, problems will almost certainly follow.

B. AREA Residential Real Estate Purchase Contract

Once the seller has found a buyer, the contract is signed and generally conveyed to the respective lawyers for both parties. There are several terms that are relevant in the contract that set out how the lawyers closing the transaction will deal with the RPR:

Para 6.1 - the seller's obligations begin with the warranties referred to in this section of the contract:
The seller warrants to the buyer the following information:

the buildings and other improvements on the land are not placed partly or wholly on any easement or utility right of way and are entirely on the land and do not encroach upon neighboring lands, except where an encroachment agreement is registered on title;

the location of the buildings and other improvements on the land complies with all relevant municipal bylaws, regulations or relaxations, granted by the appropriate municipality prior to the completion day, or the buildings and other improvements on the land are "nonconforming buildings" as that term is defined under the Municipal Government Act (Alberta).

Essentially the seller is promising that the location of everything on the property - from buildings to decks to fences - comply with municipal bylaws. The wording in the contract is exactly the same as para 11.1 of the listing contract.
But as we will see below, it is dangerous for the seller to give this warranty if they do not know it to be true.

Para 4.11 - the seller is required to provide the buyer with an RPR which reflects the current state of improvements on the property, according to the Alberta Land Surveyors Manual of Standard Practice, with evidence of municipal compliance or non-conformance. (Note: the RPR requirement doesn't apply to conventional condo units - but it does apply to bareland units.) Again, the wording of the contract is exactly the same as the provisions of 13.2 of the listing contract.
When the seller provides the RPR to the buyer, it is evidence that the warranties under para 6.1 have been fulfilled. Because the warranties in 6.1 are linked to the RPR, it is imperative that the seller have the RPR with compliance before the contract is signed.
The seller needs to determine that the report not only complies, but that it is up-to-date (driveways, fences, decks, patios and other permanent improvements) and none of the improvements encroach on areas they should not. If the seller has not done this by the time the offer is made, it may result in problems with the closing.

Para 4.4 - in this section, the RPR is defined as a "closing document" - the buyer is not required to submit documents to the Land Titles office or close the transaction until they have the opportunity to review the RPR with compliance. This is usually the point where RPR issues cause a break down of the closing.

Para 4.5 - the contract further states that if the seller does not provide the closing documents according to para 4.4, closing shall be postponed. If the Buyer is otherwise ready to close and still wishes to take possession of the property, the seller is required to give the keys and possession of the property to the buyer until the RPR matters are resolved.

The wording of the contract was drafted for sound and logical reasons because it is considered essential for the buyer to have the RPR with compliance prior to paying for the property. The contract creates an absolute protection for the buyer, but in doing so it can result in unforseen difficulties for the seller and create uncertainty, stress and insecurity for their end of the deal.

If the seller does not have an RPR with compliance in accordance with para 4.11, and the buyer does not wish to close, it is extremely difficult and awkward for the lawyer to explain at the last minute to the seller that they are in technical breach of their contract and that they will have to release keys but they won't get their money until the RPR issue is resolved.

Notwithstanding that the seller signed the listing contract acknowledging these matters, many clients often react with shock and anger or disappointment that they were not aware of the problem sooner.

This can very quickly lead to a loss of confidence and goodwill with the lawyer and the realtor. In a worst case scenario, it could lead to financial damages for delay in closing, costs to rectify RPR problems or a collapse of the entire transaction.

C. Resolving RPR Problems

In order to avoid a potential costly mess that can ruin the relationship between clients, lawyers and realtors, I recommend the following steps that will avoid almost all controversy on closing:

Review the RPR at the initial listing interview - if the RPR is actually reviewed at the listing interview and the client is advised of their warranty obligations when they list the home, 90% of the issues can be resolved. Its best to discuss this when reviewing para 11.1 and 13.2 of the listing contract.

If the RPR is accurate AND has compliance AND no encroachment issues, then a copy of the RPR should be forwarded to the seller's lawyer for immediate review and opinion.

Unfortunately, small improvements such as boundary fences, retaining walls, patios or sheds are often overlooked, so giving the document to a lawyer for review will provide certainty that the RPR is fine and you can rely on the opinion of the lawyer.

Order a new or updated RPR as soon as possible - if there is no RPR available or if the RPR is clearly needing an update, get the seller's lawyer to take immediate steps to order the report. Some surveys take up to six weeks to obtain and the report must still go to the municipal authority for a compliance stamp after that point. The seller needs to understand that, if there is a delay in this step of the process, it may delay closing. If the lawyer is charged with the task of updating and obtaining the new RPR with compliance when the property is initially listed, they will be able to better manage the risk if it is not completed by closing, if the house sells in the meantime.

Fix compliance problems ASAP - If an updated RPR comes back with compliance or encroachment related problems, it is imperative that they be dealt with immediately. Often the city will give written preliminary confirmation of the approval of a development permit or encroachment agreement, which will help in the process, although it may take 8 more weeks to finalize the process.

Give the seller their options prior to sale of the property - If there is an RPR problem discovered prior to the sale of the home, the seller may have some negotiating options:

the seller can begin the task of rectifying problems prior to finalization of the sale,

in the alternative, the seller can disclose the problems to the buyer and possibly negotiate to insert a special term that the buyer will accept the defect and obtain title insurance in lieu of compliance. In this case the option is rarely used, but it is an available option if the property has not yet sold and the term becomes part of the negotiation.

Use of Lawyers Trust conditions - If the property is sold and the RPR is updated pending final compliance, there is sometimes the option of providing the final compliance after closing, depending on how the RPR looks, through the use of trust conditions and undertakings with the lawyers.

If the report does not show any obvious encroachment or compliance issues, the lawyers can sometimes undertake to provide the document after closing by undertaking to do a holdback to cover potential costs of resolving unforseen compliance issues. Holdbacks can range from $1,000 to $20,000, depending on the issues.

Please note that this option is sometimes difficult to negotiate because this option is at the discretion of the buyer - if compliance is not provided by closing, the buyer is not forced to close. Therefore its is not recommended to rely too much on this option as a solution to close a deal on time. In any event, many sellers are not happy with the idea of a holdback so it is always better to complete the RPR/compliance before closing.

D. Conclusion

The bottom line is that it is always better to deal with the RPR at the earliest opportunity. Our office will review RPRs and provide opinions free of charge for a client prior to acceptance of an offer.

If a client has access to this service, and they take advantage of it, it will guarantee that almost all RPR related problems will never materialize and it will result in smoother closings. Clients will appreciate the advice and direction they received.

If you do not have a lawyer who gives this advice, the client should be prepared to accept the risks that compliance issues may arise on the RPR prior to closing. No one wants this to happen, therefore its always better to get on top of the matter at the outset before it becomes a problem.